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Insolvency – the bottom line!


Insolvent winding up can be achieved by two methods:
  • A compulsory winding-up. If the members are not prepared carry out a members voluntary winding up, a single creditor may be obliged to force this decision upon them. This is accomplished by the presentation of a winding-up petition;
  • A creditors' voluntary winding up if the shareholders resolve that the company is unable to carry on its business by reason of its liabilities.

COMPULSORY WINDING UP

Care should be taken before the presentation of a winding-up petition. The courts do not look favourably upon a creditor who uses the winding-up procedure as a method of imposing pressure on a solvent company which disputes the debt owing to the creditor. If the court considers that this is the case and that an abuse of process has occurred it will impose a costs penalty.

Jurisdiction


The following courts have jurisdiction to make a winding-up order:
  • the high court only if the share capital of the company exceeds £120,000
  • the county court or the high court if the share capital of the company is up to £120,000. Grounds for winding-up

In order for a winding-up order to be made, the court must be satisfied that there is evidence that the company is insolvent and that it is just and equitable to wind it up.

Evidence of insolvency


Evidence of insolvency can be provided as follows:
  • a failure to comply with a statutory demand
  • the passing of a resolution placing the company into creditors' voluntary liquidation
  • execution or other legal process is returned unsatisfied in whole or in part
  • it is proved to the satisfaction of the court that the company is unable to pay its debts as and when they fall due

Statutory demands

The procedure for serving a statutory demand is similar to the bankruptcy procedure. It must be made in a prescribed form and demand that:
  • the debtor either pays the debt or secures or compounds it to the creditor's satisfaction
  • the preceding action is taken within 21 days

There is no right to set aside a statutory demand served on a company. The remedy for the debtor company is to apply for an injunction restraining the presentation of a winding-up petition. If the application fails, the company will not be able to prevent the petition being presented or being advertised after it has been presented.

In order to serve a statutory demand there must be a debt due of in excess of £750. Although it is possible to wind up a company with a debt of £1 if there is evidence elsewhere of the company's insolvency. For example, a creditor may choose to rely on the fact that the members have passed a resolution placing the company into creditors' voluntary liquidation, therefore providing the relevant evidence of insolvency.

Consequences of compulsory winding-up

After the commencement of winding up the following transactions are void:
  • any disposition of property
  • an alteration in the status of members
  • any transfer of shares

The court has a discretion to order that this rule does not apply.

Meaning of "commencement"

If a voluntary winding up precedes a compulsory winding up, the winding up will be deemed to have commenced on the day when the members passed the resolution putting the company into winding up.

In any other case, it commences on the presentation of the winding-up petition. Purpose of legislation

The legislation is designed to ensure that creditors are dealt with equally. If the court considers that a transaction entered into after commencement of the winding up has the effect of reducing assets available to the creditors, it is unlikely to grant validation. If, following the transaction, the position is improved, the court may exercise its discretion and either allow or ratify the transaction.

Appointment of liquidator

The following can appoint a liquidator:
  • a general meeting of creditors
  • the court following either
  • administration - or
  • CVA
  • the Secretary of State acting by the Official Receiver. Voting powers

Creditors cannot vote in respect of:
  • unliquidated debts
  • secured debts unless the security has been valued and there is insufficient equity to cover the debt

The chairman can reject a proof of debt for voting purposes, but if in doubt he should allow it to vote but mark the proxy as 'objected to. If subsequently it is held that the outcome may have been affected, the court can order another meeting to take place.

Creditors' rights

There is no right of appeal against the chairman's decisions. However, the chairman's role can be scrutinised by the court.

Proxies

Notice of the meeting must contain a proxy in the prescribed form. There should be no improper solicitation by proxy. If such is subsequently found to have occurred, no remuneration will be allowed to the person who has benefited. A proxy holder cannot vote in respect of a resolution which would place him in a position to receive remuneration unless the proxy is a special proxy. If the proxy holder has signed the proxy himself and if he is to receive some remuneration, he must provide the chairman with a statement from the principal setting out his authority to do so.

Liquidation committee

If creditors consider it necessary, they can resolve to have a liquidation committee. The purpose of the committee is to supervise the activities of the liquidator and to give sanction in the exercise of certain of the liquidator's powers. The liquidation committee also sets the remuneration of the liquidator based on either the time spent on the case, or the value of the assets realised or distributed.

VOLUNTARY WINDING UP

Members voluntary winding up


It is important to draw the distinction between members' and creditors' voluntary winding up. Members' voluntary winding up occurs when a company is in a position to pay all its debts in full within 12 months. Notwithstanding the fact that the company is ostensibly solvent, only an authorised insolvency practitioner can act as liquidator.

It is sometimes the case that a members' voluntary winding up fails to pay creditors within the period specified. If this is the case, then a meeting of creditors will be held and a decision will be taken to convert it into creditors' voluntary winding up.

Creditors' voluntary winding up

If the directors resolve that the position is hopeless, then they can take the appropriate steps to place the company into creditors' voluntary winding up. To do this, they must take the following steps:
  • convene a meeting of shareholders
  • convene a meeting of creditors
  • consult an authorised insolvency practitioner who is prepared to consent to act as liquidator

Commencement of winding up

The relevant date for the commencement of the winding up is the date when the members passed the resolution to wind up the company.

Shareholders' meeting


The meeting of shareholders must be convened in accordance with the Companies Act 1985 and the Memorandum and Articles of Association of the company.

It will normally take place immediately prior to a meeting of creditors convened under the provisions of IA 1986.

The creditors' meeting


Normally, the directors will consult an insolvency practitioner. Until his appointment as liquidator, he is known as the reporting accountant. His function is to assist the directors in the preparation of the Statement of Affairs and the convening of the meeting of creditors to wind up the company.

The procedure for convening the meeting is as follows:
  • a notice of a creditors' meeting is prepared and sent to creditors — they must have at least seven days' notice
  • the creditors' meeting must be advertised in the London Gazette and two local newspapers
  • the creditors' meeting must be held within 14 days of the meeting of shareholders by which the company was placed into winding up
  • a list of creditors must be available for inspection at a place in the locality where the company traded or, alternatively, an insolvency practitioner must be nominated who will supply information to the creditors
  • the notice must specify the time for lodging the proxies not earlier than 12 noon on the last business day prior to the meeting
  • the meeting must be held at the convenience of creditors and can only take place between the hours of 10am and 4pm

If the company, without reasonable excuse, fails to comply with the provisions of IA 1986, it runs the risk of being convicted of an offence and is liable to a fine.

Entitlement to vote

Creditors must fulfil certain conditions to be entitled to vote at the meeting:
  • they must not be secured creditors
  • their claim must not be for an unliquidated amount
  • they must lodge a claim

Note that there is no requirement to lodge a proof of debt as in a compulsory winding up. Furthermore, the chairman has a discretion to allow the creditor to vote, notwithstanding a failure to lodge a claim, if a reasonable excuse is provided.

Proxies

The rules in relation to proxies apply as in other creditors' meetings. Thus all creditors need a proxy apart from sole traders or persons holding authority issued under the Companies Act 1985.

Quorum for meetings


Shareholders' meetings require a quorum of two. Creditors' meetings require a quorum of one creditor. Note that if the chairman of the meeting knows in advance that certain creditors are intending to attend, he should wait 15 minutes to allow for the arrival of latecomers.

Powers of a liquidator

This section deals with the powers of a liquidator whether the winding up is voluntary or compulsory. The powers of a liquidator are divided into three categories:
  • powers exercisable with sanction
  • powers exercisable without sanction in a voluntary winding up, but with sanction in a winding up by the court
  • powers exercisable without sanction in any winding up

The consequences of exercising a power without sanction are the same as in bankruptcy. Thus the liquidator is on risk as to the costs and expenses of acting if he fails to observe the procedure. There is power for him to arrange for the liquidation committee, the creditors' committee or the court to ratify any action, provided he can prove that there was urgency and he has not delayed in asking for the appropriate sanction.

Powers exercisable with sanction
  • power to pay any class of creditor in full
  • power to make any compromise or arrangement with creditors.
  • power to compromise on such terms as may be agreed for various types of claim

Powers exercisable without sanction in voluntary winding up but with sanction in winding up by court
  • power to bring or defend any action or other legal proceedings in the name or on behalf of the company
  • power to carry on the business of the company insofar as may be necessary for its beneficial winding up

Power exercisable without sanction in any winding up
  • power to sell the company's property by auction or private contract
  • power to do all acts and execute in the name or on behalf of the company deeds, receipts and other documents, etc
  • power to rank or prove in other insolvency
  • power to raise money on security of the assets of the company
  • power to appoint an agent to do any business which the liquidator is unable to do himself
  • power to do all things as may be necessary for the winding up of the company and its affairs and distributing its assets

Power to summon general meetings

The liquidator can summon general meetings to assist him in the winding up and to ascertain the creditors' wishes.

Power to disclaim

The liquidator's power of disclaimer is comparable with that of a trustee in bankruptcy. Only a liquidator has the power. Therefore, a company that is either in administration or receivership will have to wait for any ensuing liquidation.

The procedure commences with the liquidator completing the prescribed from. He requires no prior authority to take this step. He then serves it upon any persons who have an interest such as:
  • guarantors
  • prior tenants
  • landlords

Such persons have power to apply to the court for a vesting order. The application will be made at the court where the notice of disclaimer was lodged.

Effect of disclaimer

The effect of disclaimer is exactly the same as in bankruptcy, i.e. it determines the rights, interests and liabilities of the company in respect of a disclaimed property. The rights of third parties are not affected unless this is a necessary consequence of releasing the company.

Duty of liquidator


A liquidator is under a duty to exercise skill and care. Note that in spite of the fact that a liquidator has the power to call creditors' meetings, any decision made is ultimately his. He is not bound to follow any decision made by the creditors. Any person who is aggrieved by any action of the liquidator has the right to apply to the court under IA 1986. If such an application is made, the court has the power to confirm, reverse or modify the act or decision complained of.

ADMINISTRATIVE RECEIVERSHIP

There are two types of receiver with radically different powers. These are:
  • administrative receivers
  • other receivers

The term receiver includes:
  • a receiver or manager - or
  • a receiver of part only of the property - and
  • a receiver only of the income arising from the property or part of it whereas an administrative receiver means
  • a receiver or manager of the whole (or substantially the whole) or a company's property appointed by or on behalf of the holder of a floating charge - or
  • a person who would be such a receiver or manager but for the appointment of some other person as the receiver of part of the company's property

The provisions of the Enterprise Act 2002 (EA 2002) have created a two tier system with respect to floating charges. Holders of floating charges created after the act came into force (i.e. after 15 September 2003) do not have the right to appoint an administrative receiver and will have to enforce the security by the appointment of an administrator. However, holders of floating charges created before the EA 2002 came into force ("qualifying floating charges" (QFCH)) retain the right. The new provisions do allow very specific exceptions relating for example, to certain capital market agreements and financing transactions, but it seems that most "new" floating charges will be subject to the EA 2002.

Under a QFCH an administrative receiver can only be appointed where there is a general charge over the whole or substantially the whole of the company's assets. Further, the appointment of a receiver of part of the company's property will not prevent the holder of a floating charge over the whole or substantially the whole of the company's assets from appointing an administrative receiver.

Power to appoint administrative receiver

The power to appoint an administrative receiver must be expressly stated in the security instrument. Two or more persons may be appointed, and the instrument must specify whether they have authority to act individually or jointly.

An administrative receiver must be a qualified insolvency practitioner. He is deemed to be the agent of the company until it goes into winding up. His acts are valid notwithstanding any defect in his appointment or qualifications, and persons dealing with him in good faith including directors and officers of the company are fully protected, even if aware of the defect.

An administrative receiver has the same statutory powers as an administrator, except in so far as they are inconsistent with the terms of the security instrument under which he is appointed but a person dealing with him in good faith and for value is not concerned to enquire whether the receiver is acting within his powers. The powers conferred upon him are set out in Schedule 1 to IA 1986. The include the power to:
  • take possession of and get in the company's assets and, in order to do so, institute legal proceedings, refer disputes to arbitration, compromise them or prove for debts owed to the company by an insolvent debtor
  • carry on the company's business
  • make any payment necessary or incidental to the performance of his functions, issue cheques in the name of the company and effect and maintain insurance
  • employ agents, solicitors and other professionals to assist him
  • sell the assets
  • execute company documents in the company's name and use its seal
  • grant leases of the company's property
  • establish subsidiaries, transfer parts of the company's business to them and sell the subsidiaries
  • employ and dismiss employees
  • call up uncalled capital
  • present or defend a petition for winding up
  • do all things necessary for the realisation of the property, and anything incidental to the exercise of his other powers

An administrative receiver can apply to the court for power to dispose of any secured property of the company, but he must discharge the secured debt from the net proceeds of the sale plus any sum fixed by the court and equalling the amount which would have been realised by a sale on the open market by a willing vendor. A receiver can require the continued supply of gas, water, electricity or telecommunications services without payment for services supplied before their appointment.

Effect of the receivership

The company's undertakings and assets are controlled by a new agent but ownership and contracts are unaffected. Assets covered by the floating charge under which the receiver is appointed are protected against execution by unsecured creditors, including garnishee and charging orders. But landlords can distrain for rent arrears if the receiver remains in occupation.

Contracts of employment

An administrative receiver, or receiver appointed under the security instrument, is not personally liable in respect of contracts of employment existing at the date of appointment unless he "adopts" them, but no act or omission within 14 days of his appointment constitutes adoption. Receivers used to avoid adopting contracts by issuing a letter to employees stating that although their services were being retained, this was not to be taken as an adoption. This practice was rejected by the Court of Appeal in Re Paramount Airways (1994] and meant that any keeping on of employees after the 14 day period would constitute adoption. Since this could have exposed receivers to tremendous liability and discouraged attempts to rescue the business, the effect of the case was mitigated by section 2 of the Insolvency Act 1994 which relates to administrative receivers. This provides for the adoption of the contracts but limits liability to:
  • qualifying liabilities designed to exclude wages arrears for services provided prior to the adoption of the contract
  • unpaid pension contributions during this same period - and
  • contractual entitlements to payments in lieu of notice

The section does not apply to non-administrative receivers who remain exposed to liability under IA 1986, although may be protected by the right of indemnity.

Directors remain in office and retain their powers subject to the obligation to give effect to the directions of the receiver in relation to the assets under his control.

Contracts terminate on the making of a winding-up order against the company or if the receiver sells the assets or closes the business. If the business is sold in whole or in part as a going concern, contracts are transferred to the purchaser (pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 1981).

Liability on contracts


The receiver is personally liable on contracts entered into by him in carrying out his functions, unless liability is excluded in the contract, subject to a right of indemnity out of the company. He is not generally liable on contracts existing at the time of his appointment, but the contracts can be specifically enforced against the receiver.

Duties of the receiver


The primary duty of a receiver is to realise the assets in the interests of the debenture holders and he is entitled to damage the principal's interest if this is a necessary result of the execution of his primary functions.

Receivers must satisfy preferential creditors in priority to claims under the debenture but there is no general duty to ordinary creditors. Administrative receivers must provide information of the progress of the receivership, particularly to creditors, and they must file annual accounts and provide copies to their appointor and the creditors' committee.

The conclusion of receivership

Administrative receivers may resign on giving seven day's notice to the appointor, the company (or its liquidator) and the creditors' committee, except where resigning by arrangement with an administrator. They must vacate office on ceasing to be qualified insolvency practitioners, or where an administrator is appointed by the court.

The receivership terminates when the receiver has realised all the assets, paid the preferential creditors and prior chargees and the appointing creditor. Any surplus funds are returned to the company.

The administrative receiver must give notice of termination to the company or its liquidator and the creditors' committee.

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